Tag: decline

Information technology (IT) hardware is likely to become more expensive in SA because of the weak economy and rand, according to Mark Walker, associate vice-president for sub-Saharan Africa at the International Data Corporation.

“SA is looking at a growth rate of 0.7% to 1.5% [in 2018]. Many organisations are pricing this weak economy into their discussions as it means that hardware and imported equipment will be more expensive.

“There are also murmurs around adding VAT to petrol and potential increases in taxes, so the technology sector could very well be an easy target from a tax point of view.”

As a result, IT was expected to become more expensive, particularly hardware, and this was likely to prompt “an acceleration into cloud-based computing”, Walker said.

Further, if the outcome of the ANC’s elective conference was not well received, the market would weaken further and this would further fuel the rise in IT costs.

Innovation and investment could be affected by the lacklustre economy, he said. “We have started seeing a trend emerge where you have individuals and organisations innovating locally, but then taking those ideas overseas because they are not able to unlock investment in the local market.”

However, a favourable elective conference outcome would be a boon for the local IT sector.

“The perception that SA is back on track could herald in a period of release of pent-up demand, investment spend on innovation and rolling out the infrastructure to enable broadband in rural areas, fibre and others that SA gravely needs.”

South African packaging and paper company Mondi said on Thursday underlying operating profit for the first quarter of 2017 was down 6% due to lower selling prices and inflationary cost pressures.

Underlying operating profit fell to 252-million euros ($274-million) in the three months through March from 269 million euros a year ago, Mondi, which is also listed in London said in a statement.

The figure was up 12% on the fourth quarter last year due to higher sales volumes and prices.

“Strong sales volume growth was more than offset by a significantly lower forestry fair value gain, inflationary cost pressures and lower average selling prices,” the company said.

The packaging paper division was impacted by lower selling prices for containerboard, while significantly lower gains on the value of its forestry assets, lower average export selling prices for hardwood pulp and white top kraftliner products, and a stronger rand impacted the South Africa division.

“As previously advised, we are experiencing some inflationary cost pressures across the Group and the forestry fair value gain is expected to be lower than in 2016,” the company said.

The “Oracle of Omaha”, Warren Buffet, has dropped Walmart from his portfolio like a ton of bricks, pronouncing ominously that a retailer in decline is difficult to turn around.

Buffett’s Berkshire Hathaway investment vehicle sold off $900-million of Walmart stock in the last quarter, or about 90% of what he had left after years of slowly reducing his holding in the biggest big-box of all.

Pundits the globe over are seeing Warren Buffett’s rejection of Walmart as symptomatic of a broader malaise in traditional retail, embattled as it is by rocketing online sales.

“It is a big, big force,” he pronounces in doom-laden tones, “and it has already disrupted plenty of people and it will disrupt more.”

He avers that many businesses have worked out neither how to cash in nor how to counter it, a view which no doubt informed his Walmart decision.

Brick and mortar retailers had better figure out, and fast, how to compete with the online version or the carnage will continue.

Stationery sales at news agencies dropped markedly in the pre-Christmas period according to the latest “benchmark survey” by news agency owner and commentator Mark Fletcher.

Fletcher, a director of franchise group newsXpress and software company Tower Systems, says the December 2016 quarter for traditional news agencies was “dreadful” with 85% of surveyed businesses reporting a decline in stationery sales with the average decrease being 2,7%.

The latest survey covered 171 news agencies – large and small, city and country, shopping centre and high street and from all Newspower, the various versions of Nextra and newsXpress as well as independents.

Tobacco – pf the 44% with tobacco, 85% report an average decline of 11%;

Confectionery – of the 51% with confectionery, 60% report an average decline of 4%; and

Toys – of the 16% with toys, 80% report growth of 6.7%.

On a brighter note, Fletcher says a third of participating news agency businesses doubled gift sales in the December 2016 quarter compared to 2015.

“The most successful news agency in gifts did over $100 000 in gift sales the quarter. This is a regional news agency in a high street situation,” he says. “The most successful news agency in the plush category did over $70 000 in plush revenue in the quarter.”

HP is set to cut between 3 000 and 4 000 jobs worldwide over the next three years, as it seeks to make savings as PC sales continue to plummet.

The world’s second-largest PC supplier has struggled in a dwindling market, and hopes the cutbacks will save the company between $200-million to $300-million annually by 2020.

However, HP will also incur an estimated $350-million to $500-million in restructuring costs.

According to a filing made to the Security and Exchange Commission on Thursday, HP plans to swing the axe between 2017 and 2019, spread across the many countries and regions the company operates in.

HP split into two divisions in September 2015, resulting in a loss of 30 000 jobs – almost 10% of the workforce. Today HP Inc oversees printers and computers while Hewlett Packard Enterprise focuses on enterprise services, though it has spun off much of its software business.

“I’m proud of the progress we have made in our first year as the new HP. Our focus is clear, our execution is solid, and we are positioned well for the next step in our journey,” says Don Weisler, president and CEO of HP, in a statement.

“We are confident in our strategy and believe it will continue to produce reliable returns and cash flow, while also enabling HP to invest in differentiated innovation and long-term growth.”

Weisler acknowledges that the market is currently “challenging”, but says the company is still “committed to innovating”, pointing to HP’s current opportunities in manufacturing and 3D printing.

The announcement comes during a global decline in PC sales, dropping 5,7% in the third quarter compared to last year according to a report by Gartner. This represents the longest period of decline in the history of the PC industry.

Office Depot stocks are in serious trouble. Its hoped-for acquisition by rival Staples appears less and less likely, even as its business continues to be eroded by online retailers.

Office Depot shares rallied starting in late 2014 and early 2015, first on speculation about a merger and then on official confirmation of it. Staples said it would pay $7.25 in cash and 0.2188 of one of its own shares for each share of Office Depot.
Since then, the stock’s trajectory has been lower because of concerns the deal wouldn’t pass regulatory muster. Over the past year, shares have lost 43%.

What lies ahead for Office Depot?

First let’s explore the merger in greater detail. Investors had poured into the stock hoping to receive a nice payout from the eventual Staples acquisition. But the Federal Trade Commission in December filed a lawsuit to stop the acquisition, and Staples’ challenges to regulators have already suffered at least one crucial setback.

And even though both companies recently agreed to sell some assets after their deal is completed in order to assuage regulators, the FTC hasn’t veered from its opposition. Now a March courtroom battle looms. The companies have extended the merger termination date to May 16 in order to give themselves enough time to try to win the legal fight, but investors shouldn’t hold their breath, given how firm the government opposition is.

Now let’s look at expectations for Office Depot’s coming earnings report and what they indicate about its underlying business.

Office Depot plans to report earnings for the quarter that ended 26 December 2015 on Tuesday 23 Febrauary. On average, analysts expect adjusted earnings per share to increase to 11 cents from 7 cents a year earlier, but revenue is expected to drop 7,2% to $3.56-billion.

Declining revenue is the trend, too. The company missed revenue expectations in all of the past four quarters. Analysts also expect sales to decline year over year in the current fiscal quarter and for all of fiscal 2016, which ends on 26 December this year.

The declining revenue appears to have two causes. First is store closures and other adjustments linked to the deal with Staples. Second is the challenge to traditional office supply retailers from online competitors – most notably Amazon.

When Staples announced the Office depot acquisition, it said that cost savings from the deal would total at least $1-billion by the third full fiscal year after the deal closed. It’s true that a combined company (which we’ve noted appears more and more unlikely anyway) would benefit from lower costs and a smaller retail footprint, but the real problem is sales stagnation for both of these companies, combined or separate.

Reversing that stagnation requires that they refocus their efforts more on online sales. But even if they do that, success is by no means guaranteed, because Amazon is such a formidable competitor.

Investors should be very cautious about Office Depot stock at this time. Don’t be fooled by the forward price-to-earnings ratio of less than 10. This stock is cheap for good reason.

According to research by International Data Corporation (IDC), the Western European printer and multi-function (MFP) market decreased 4,9% in unit terms compared with the same period a year ago, with negative performances in both inkjet and laser segments.

This gave a 4Q15 market figure of 6,5-million units — a decline of 333 000 units, largely due to the contraction in consumer printing. Revenues increased by 1%, but lasers were largely responsible for the value increase as inkjet revenues fell by 14,3%.

The laser markets were relatively decent in 4Q15, following the negative trend seen in the previous two quarters in Western Europe. Still the, combined printer and MFP laser shipments decreased 1% in 4Q15.

For the first time in almost three years, business inkjet growth stuttered and remained flat. However, MFP products showed the highest growth rate with a 2,7% increase, but business inkjet printers suffered a massive 29% decrease in 4Q15. In fact, business inkjet MFP represented 92,1% of business inkjet shipments in 4Q15 and this trend is unlikely to be reversed.

Growth in the business market, comprising laser and business inkjet devices, slowed down, but the value decreased by 3,5%. The highest value growth was shown in 45ppm+ colour devices, a positive trend already observed last quarter and becoming stronger in 4Q15.

Shares of various paper and packaging companies tumbled on Monday following a slew of analyst downgrades driven by concerns over pricing. International Paper was down about 10% shortly before the market closed on Monday, while smaller players Graphic Packaging Holding Co and Packaging Corp of America were down 9,6% and 12,3% respectively.

Earlier in the day, Graphic Packaging was down as much as 10,7%, while Packaging Corp of America bottomed out at a 13,1% loss.

What’s going on?
International Paper and Packaging Corp of America were hit with downgrades, along with other companies in the same sector. Citi cut its rating for both companies to neutral, and its price target for International Paper stock dropped to $38, down from $45. Macquarie downgraded KapStone Paper & Packaging, while Bank of America cut its rating of WestRock. Both of those stocks also suffered heavy losses on Monday. Graphic Packaging didn’t catch a major downgrade, but the stock slumped along with the rest of the sector.

The main concern cited by Citi relates to pricing. In January, kraftliner prices declined by 2.4% to $15 per tonne, while corrugated medium prices fell 3,7% to $20 per tonne, according to Citi. Given that these products are largely commodities, falling prices could signal that the sector is getting more competitive, which could lead to further price declines going forward.

This downgrade from Citi comes a little more than one month after the firm listed International Paper as a top value stock for 2016. International Paper’s revenue has been essentially flat for the past decade, but the company has been generating substantial free cash flow over the past few years. In 2014, the company reported $1.7 billion of free cash flow, up from just $856 million in 2010. The company’s operating margin over the past 12 months was 13.3%, well above the 3.3% operating margin the company managed in 2010.

Packaging Corp of America is also coming off of some highly profitable years, with an operating margin of 12% in 2014, compared with 7,6% in 2010. Over the past 12 months, Graphic Packaging has managed an operating margin of 10%, well above its 5,4% operating margin in 2010.

Citi pointed out that during previous periods of price declines, list prices fell in a “disorganised fashion” for months. With profitability for all three companies at high levels, falling prices could lead to margin erosion in the coming months.

Shares of International Paper, Packaging Corp of America, a Graphic Packaging have all slumped over the past year, even before the declines on Monday. For all three stocks, this decline was preceded by substantial multiyear gains, coinciding with increasing profitability.

When considering companies in cyclical, commodity industries, it’s always important to understand that profitability can fluctuate from year to year. All three stocks look inexpensive based on forward earnings estimates, but those estimates will likely decline given the current pricing environment. Buying shares of a company based on peak earnings is a recipe for overpaying for the stock.

Predicting where paper and packaging prices will go in the coming months is next to impossible. Further price declines are possible, which could cause margins at all three companies to contract. The most optimistic scenario is that these price declines are a one-off, with prices stabilising and margins remaining high.

While analyst upgrades and downgrades should always be taken with a grain of salt, the concerns that Citi and other firms have about International Paper, Packaging Corp of America, and the rest of the sector should not be ignored by investors looking for bargains.